CHAPTER 17 ECON
Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5 percent to 9 percent, the Fisher effect suggests that, in the long run, the nominal interest rate should become
11 percent
If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 20 percent, what is the after-tax real interest rate?
2 percent
If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is
3 percent
In the long run, the demand for money is most dependent upon Answer
the level of prices
Fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate
An example of a real variable is
the ratio of the value of wages to the price of soda.
If the price level doubles,
the value of money has been cut by half.
An inflation tax is "paid" by those who hold money because inflation reduces the value of their money holdings.
true
Countries that spend more money than they can collect from taxing or borrowing tend to print too much money, which causes inflation. Answer
true
If the money supply is $500, real output is 2,500 units, and the average price of a unit of real output is $2, the velocity of money is
true
If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions.
true
Inflation reduces the relative price of goods whose prices have been temporarily held constant to avoid the costs associated with changing prices.
true
The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 percent to 7 percent, the nominal interest rate should increase 4 percentage points, and the real interest rate should remain unchanged.
true
nominal variables
variables measured in monetary units ($)
Real Variables
variables measured in physical units
If actual inflation turns out to be greater than people had expected, then
wealth was redistributed to borrowers from lenders.
If money is neutral,
a change in the money supply only affects nominal variables such as prices and dollar wages.
The quantity theory of money concludes that an increase in the money supply causes
a proportional increase in prices
An inflation tax is
a tax on people who hold money.
principle of monetary neutrality
an increase in the rate of money growth raises the rate of inflation but does not affect any real variable
Which of the following costs of inflation does not occur when inflation is constant and predictable?
arbitrary redistributions of wealth
the quantity theory of money
developed by 18th century philosopher david hume and the classical economists
An increase in the price level is the same as a decrease in the value of money.
false
If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.
false
If the nominal interest rate is 7 percent and the inflation rate is 5 percent, the real interest rate is 12 percent.
false
Inflation erodes the value of people's wages and reduces their standard of living.
false
Inflation tends to stimulate saving because it raises the after-tax real return to saving.
false
Monetary neutrality means that a change in the money supply doesn't cause a change in anything at all.
false
The quantity theory of money suggests that an increase in the money supply increases real output proportionately.
false
The shoeleather costs of inflation should be approximately the same for a medical doctor and for an unemployed worker.
false
in the long run, an increase in the money supply tends to have an effect on real variables but no effect on nominal variables.
false
Countries that employ an inflation tax do so because
government expenditures are high and the government has inadequate tax collections and difficulty borrowing.
In the long run, inflation is caused by
governments that print too much money.
When prices rise at an extraordinarily high rate, it is called Answer
hyperinflation
If the money supply grows 5 percent and real output grows 2 percent, prices should rise by
less than 5 percent.
Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of
menu costs.
The quantity equation states that
money X velocity = price level X real output
Suppose that, because of inflation, people in Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of
shoe leather costs
the quantity of money theory
suggests economic variables be divided into two groups nominal and real variable now called the classical dichotomy
velocity is
the annual rate of turnover of the money supply.
Which of the following statements about inflation is not true?
Inflation reduces people's real purchasing power because it raises the cost of the things people buy.